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Making sense of the government's help to buy scheme

Posted: 13/06/2013

This morning I’ve been chatting live with Burnsy on BBC Radio Humberside about the property market at the moment, and the government’s attempts to boost the housing market and the economy as a whole, so I thought I would write a brief article to assist anyone thinking about taking advantage of such scheme.

There have been a number of schemes, so it can be confusing, but I’ll just give a quick overview. The new Help to Buy Equity Loan Scheme started on 1 April this year, in effect replacing the FirstBuy Scheme which started in March last year. The original scheme was only for first time buyers, whereas the new scheme is available to all buyers of new homes, up to the value of £600,000. In effect, you get a mortgage for 75%, you put in a deposit of 5%, and the rest is a loan from the government.

A further scheme will start from 1st January 2014, called Help to Buy Mortgage Guarantees. This will be open to both first time buyers and home movers. The details are still to be confirmed, but in effect you will be able to buy a property with a deposit of only 5% of the purchase price.

‘Pros’

It’s been a terrible 5 years for the economy and the government are trying very hard to boost our economy. The purpose of these schemes is to re-stimulate house buying, in order to re-stimulate construction, which in turn boosts other sectors such as home furnishings, appliances, trades, etc. In short, house buying has the power to kick-start many parts of the economy and to create jobs. That is great, we all want jobs and we all want a return to the good times.

‘Cons’

However, there is a ‘but’. The number of people in negative equity and the number of properties repossessed in recent years show only too clearly the risk of over-stretching yourself when buying a property. Interest rates are at their lowest and have to go up at some stage. Given that some of the deals being offered under this scheme by mortgage lenders are for a fixed period of 2 years, the buyer could well face inflated monthly mortgage payments once interest rates start to climb, at which point they might start to struggle with their monthly repayments.

I also have some concerns about the way the new scheme might be being ‘sold’ to potential buyers. Only yesterday I was talking to a young property solicitor who has just been to look at some new builds. Because of her job, she is fully aware of the how the schemes works, but was shocked at the way the new scheme was being offered to a young couple who were viewing whilst she was there. If the property costs 100k, you put in 5k, you get a mortgage for 25k, and the government loans you 20k. Each month you start paying back the mortgage with interest, but the government loan is interest free for the first 5 years. After that, you have to start paying back the interest on that too. And yet, the message they were given was the loan is interest-free, which it most certainly is not. This could lead to people buying a more expensive house because they think they can manage a higher monthly repayment, only to find 10 years later that they can’t keep up with the repayments. Furthermore, whereas if you go along with a 10% deposit builders will give you the world – carpets, special fittings, and so on. But it appears that on this scheme the message is that you’re already getting a really special offering, so there’s no room for negotiation on the price and you get no extras.

Do we want prices to go up or down?

Some experts feel that these schemes are an attempt to stop property prices dropping further than they already have. And many people feel that we should let prices fall, to make homes more affordable. After all, since around 2000 the increase in property prices in this region has been far greater than the increase in people’s income, making it more and more difficult to buy and keep a property. BUT, if prices were to drop, just think how many more homeowners will fall into negative equity? So we do need stability. And of course we need growth, but not if it puts buyers at risk of running into problems further down the line.

This country has a culture of home ownership, getting on the housing ladder, owning your own home. And the government will continue to encourage that because it’s good for the economy. When the chancellor George Osborne announced this scheme in the March budget, he said that it would "support a new generation in realising the dream of home ownership".

So what is the answer?

For me, the answer is simple. Each individual or couple must do what is right for them and their circumstances. And that HAS to include getting sound financial advice, which in my view means independent financial advice. So if you go along to see a building development and they advise you to buy a house on this scheme, it may be right for you, but it may not be, so for heaven’s sake go away and get independent advice from someone who will take into account your financial circumstances. When considering your monthly mortgage payment, leave plenty of headroom for when interest rates do eventually increase. Don’t overstretch yourself. It’s not worth the risk. Be sensible, you can always upsize in a few years’ time. Homeownership might not be the right option for you right now. But if it is, then go for it. And when it comes to negotiation, be strong and be prepared to walk away. You want money off the price and you want all sort of goodies included. Got that?!

Finally, if you, or your family and friends, ever need property advice, please remember….. it has to be Hudson's :-)